Mothers Work might consider 11¼% notes buyback; nothing drawn against revolver

By Paul Deckelman

New York, Feb. 8 - Mothers Work Inc. said Wednesday that it had posted strong results in the 2006 fiscal first quarter ended Dec. 31, helping to boost its free cash flow solidly, and it sees more of the same ahead. Executives of the Philadelphia-based maternity wear retailer also told analysts on a conference call following the release of the quarterly results that redemption of some of the company's 11¼% senior notes due 2010 might be an option it will look into, although they stressed that no decision had been made at this point.

They also noted that the company has a strong liquidity position, with nothing drawn against its $60 million revolving credit facility as of the end of the quarter, and only a relatively small amount of letters of credit debt outstanding.

"We are very pleased with our strong sales, earnings and cash flow performance for the first quarter of fiscal 2006," enthused the company's chief financial officer, Edward M. Krell, on the conference call. He said that the trend was also carrying forward into the current fiscal second quarter, with strong unofficial results seen in January.

Krell noted that the company's comparable-store sales - i.e. sales from stores open at least a year, considered the key performance metric in the retailing industry - rose 3.1% in the quarter from year ago levels, and were even stronger, up 3.9%, in January.

"We believe that the oversupply conditions that plagued the maternity apparel business during our fiscal 2004 and fiscal 2005 have eased somewhat," the CFO said, "and we believe our strong sales trend in recent months reflects this."

Besides stronger sales at its existing stores, company results were helped by a number of strategic initiatives Mothers Work undertook in 2005, including the consolidation of its older, smaller stores into larger multi-brand stores, including almost a dozen of its considerably larger Destination Maternity Superstores. The biggest and the glitziest of these - the company's 10th - opened to rave reviews just last week in the middle of Manhattan's toniest shopping district, at Madison Avenue and East 57th Street. The fashion industry trade publication Women's Wear Daily called the three-story store - whose wares go beyond just maternity clothing and include nursing and fertility-related products, books and maternity exercise gear, and which includes a spa type shop, a play area for the shopper's young children and a "relax area" where husbands can cool their heels - "a theme park for pregnant women."

Besides its own stores, the company has had success selling its Two Hearts clothing line in leased departments at 573 Sears locations nationwide and its Oh Baby! By Motherhood collection through a licensed arrangement at 732 Kohl's department stores in 41 states. Krell and company president and chief operating officer Rebecca Matthias told the conference call these initiatives, both of which began in 2005, would be broadened, and said that 2006 results would reflect their full-year impact.

Sales up 13.3%

Consolidated net sales for the quarter totaled $151.4 million, up 13.3% from $133.6 million in the year-earlier quarter, with the increase mostly driven by the Sears and Kohl's initiatives and the comparable-store sales increase.

The better sales, plus inventory improvements - they were down 3.7% year-over-year - led to improved cash flow from operations and liquidity measurements, Krell said, pronouncing himself "very pleased" with them.

No bank borrowings

He noted that during the quarter, the company had average outstanding borrowings from its credit line of $1.3 million, and ended the quarter with no outstanding borrowings under the $60 million facility. Mothers Work - which had slightly less than $9 million in letters of credit outstanding - had more than $51 million of revolver availability at quarter's end, and, Krell said, "collateral value well in excess of $60 million," so it has the full asset base under the terms of its agreement.

"Although we had modest borrowings" from the facility during portions of fiscal 2005 and portions of the 2006 fiscal first quarter, which he said reflected seasonal and other timing variations in cash flow, "we did not have any outstanding credit line borrowings at the end of the fiscal first quarter of 2006, and expect to have none at the end of fiscal 2006."

He elaborated on this in answering an analyst's question, declaring "we don't expect to be in [the facility, i.e. having outstanding revolver borrowings] at any quarter end," adding that "whether or not we're in it for a day here and there at the seasonal low point, which would be around now, it might happen, but so far we're not in the revolver."

Such borrowing "could happen - but it would just be a touch, and it would just be on a very temporary basis." He explained that he expects no outstanding revolver borrowings at any quarter end "and certainly at year-end, because we're saying we're going to have a minimum of $20 million of cash and short-term investments."

The company had $25.3 million of cash and short-term investments as of the end of the quarter, an increase of $8.1 million from the year-earlier quarter-end cash/short-term investments balance of $17.2 million.

"Significant" free cash flow

Krell said the company is looking forward to generating "significant positive free cash flow" during fiscal 2006, and sees a balance of cash and short-term investments at the end of the fiscal year in September of at least $20 million, which would be up at least $17 million from the $3 million cash/short-term investments balance at the end of fiscal 2005.

Considering calling bonds

An analyst asked Krell whether the company plans to use the free cash flow it expects to generate to pay down its $125 million of 11¼% notes, or whether it would draw on its revolver to pay down the notes. Those bonds become callable for the first time on Aug. 1 at a takeout price of 105.6, with the call price steadily decreasing year-by-year until it hits par a year before the scheduled 2010 maturity.

The CFO replied that "we do have the ability to use cash to repay the senior notes, and we do have the ability - there are some limitations, but we've got significant leeway - to be able to draw on the revolving credit facility" to pay those senior notes.

However, whether the company will do so is another question. He said that calling some bonds is "certainly is a potential use of cash" - he later told another analyst that it "may well be a good use of cash" - but he added that "we haven't made any decisions on that at this point."

Interest expense for the quarter, net of interest income, stood at $3.8 million, unchanged from a year earlier. Krell projected that interest costs for fiscal 2006 would total about $14.9 million.

Krell said that the company - which had net income during the quarter, after paying stock option expenses, of $400,000 (eight cents per diluted share), much improved from a year-earlier loss of $200,000 (five cents a share) - was increasing its earnings per-share guidance for the full fiscal year to between 79 cents and $1.03 per share, after payment of stock options, up from its prior projections of 64 cents to 87 cents per share.

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